Key Observations
- Full valuations, concentrated U.S. large-cap indexes and the risk of reigniting inflation are shaping the key themes we believe will drive markets and portfolio strategy in 2025.
- Recent market strength has pushed our 2025 10-year forecasts lower across most major asset classes. Long-term return premium for equities over fixed income is now at its narrowest since 2007, sparking important conversations about portfolio posture and risk allocation.
- Rising reinflation risk leads us to increase our allocation to more flexible fixed income strategies.
- Moving toward active management and placing an increased emphasis on income producing investments to enhance portfolio resilience and adapt to the shifting landscape.
As we wrap up the year, we reflect on the themes that carried out through 2024 leading to another strong year in the stock market. The Federal Reserve (the Fed) began to cut interest rates in September, which brought fixed income yields broadly lower from 2023. A soft landing for the economy added confidence to the Fed as it changed the direction of interest rates even as the landscape was marked by continued volatility, unexpected geopolitical events and a presidential election. Broadly speaking, markets performed well. The concentrated performance theme of the “Magnificent 7” that lead to stock index record highs in 2023 continued in 2024 and the fragility of this scenario carries through as we turn towards 2025. In 2025 we highlight the fragility within U.S. equities, driven by the narrow outperformance of the “Magnificent 7” and the potential for opportunity in areas beyond this concentration. In fact, this narrative has only intensified and by November 30, 2024, the top 10 stocks of the S&P 500 accounted for 35% of the index. Still, green shoots remain. Small cap stocks showed strength and they outpaced large caps for the one-year period ending November 30, 20241. Now, as we step into 2025, our focus sharpens on resilience and adaptability that empower us to navigate any fragility that may lie ahead.
1) Dynamic bonds are a blend of 33% Cash, 33% Corp HY and 34% Global Bonds. 2) Tax Equivalent yield based
on highest marginal Federal tax rate (37%). 3) Broad Real Assets is 20% REITS, 20% Global Infrastructure, 20%
Commodities, 20% US Bonds, 15% Corp High Yield, 5% TIPS. 4) FactSet, as of November 30, 2024.
Source: Fiducient Advisors Capital Market Assumptions. Market and economic data including, but not limited to, valuations, fixed income yields and inflation, are used to derive forecasts. Outputs and opinions are as of the date referenced and are subject to change. Information is intended for general information purposes only and does not represent any specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. There is no guarantee that any of these expectations will become actual results. Past performance does not indicate future performance and there is a possibility of a loss.
For additional information on forecast methodologies, please speak with your advisor. Please see Index Proxy Summary information at the end of this paper for summary of indices used to represent each asset class.
2025 Themes
Markets stand at an unprecedented crossroads. While optimism remains, the path forward for the stock. market is anything but straightforward. In 2025, our outlook centers on three pivotal themes: fragility,
In the near term, we prefer the higher income-producing returns on real estate investments (particular multi-family housing) and of bonds that look attractive on a risk-adjusted basis compared to stocks. However, we emphasize the importance of maintaining a strategic outlook on your overall portfolio and the long-term benefits of holding stocks even during times of uncertainty like the ones we are currently facing.
The international stock markets have also shown recent strength, with European markets remaining positive for the year so far. The European economy is benefiting from rapidly falling interest rates, as the European Central Bank (ECB) has already implemented three rate cuts in 2024 to stave off a recession while the economy recovers from the pandemic years.
| YTD thru 10/18/2024 | 15 Year Average | |
| US Large Cap | 24.33% | 14.10% |
| US Small Cap | 13.50% | 10.60% |
| International | 10.31% | 6.00% |
| US Bond | 2.98% | 2.60% |
AI – Exciting or Daunting?
Both. Artificial intelligence (AI) has delivered the most market excitement since the internet became omnipresent in everyday life. This emerging technology promises to be useful, but the question remains as to who will be the big winners and losers of this revolution. Chip makers producing the engine behind AI have dominated the headlines thus far, while we are watchful for the industries and industry leaders that will execute best on creating value with AI technology. There is much more to come on this front.
1 Morningstar. As of November 30, 2024. Small cap = Russell 2000 Index, Large Cap = S&P 500 Index
The information presented in this newsletter is the opinion of Alpha Capital Family Office, LLC and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. Alpha Capital Family Office, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission.
